Moneyball without the ball

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I made a number of portfolio changes today, reducing positions in a few stocks that haven’t been working out as I had hoped. I sold the last of Pacific Ethanol, sold out of Syncora and reduced my position in Chipmos. In part I made these changes to raise cash because I have been adding to my position in Transat A.T.

I first bought Transat A.T (TRZ.B) on March 19th and have added to it a few times since then. I made the following tweets at the time (read from bottom to top):

What they do

Transat provides both chartered and scheduled flights originating in Canada and France. They operate three main service routes.

Portfolio Performance

See the end of the post for the current make up of my portfolio and the last four weeks of trades.

Recent Developments

Four weeks ago I wrote:

I think an important pillar of my strategy to take advantage of the concentration that I can have. I don’t have anyone pressuring me to be diversified or questioning my risk level or anyone to answer to if something goes wrong. So I don’t hesitate to have a large percentage of my portfolio tied to the names I think will perform the best.

With that said, the names that I am currently of the heaviest weight are, of course, Pacific Ethanol, which remains my largest position by far

I got the idea for Aercap (AER) after listening to a Bloomberg Taking Stock podcast with Martin Sass. Sass recommended Aercap along with American Airlines (another company I am in the process of looking at) as he’s gone from hate to love on the airline industry. He called Aercap’s deal to acquire ILFC “transformative”, pointing out that it “will make Aercap Holdings the #1 aircraft leasing company in the world”, and yet that “it’s trading at only 8x earnings.”

On Thursday I tweeted a few reasons justifying my position in Aercap. You want to read these from the bottom up.

In this post I am going to follow up on that tweet with a more detailed description of my investment thesis. Read more

I missed out on the big move in the airline companies last year because I never bothered to look at them. And the reason I never looked at them is because I have been conditioned to be skeptical about airline stocks. The mantra chimes away about high capital costs and low hurdles to entry, profits on the horizon that will be never quite there.

But things have changed and with only three major carriers in the United States (down from around 10 a decade ago) price-wars and seat sales have been replaced by full planes and higher profits.

One thing the airline industry has going for it that is rarely mentioned is that once you pass the hurdle of covering your cost, every incremental passenger is at an 80% margin (give or take, depending on the airline).

This provides a lot of leverage if things start to go well. With 5 years of improving profitability (coming off the disastrous bottom of 2008-2009) things are going well right now. The moves last year was a recognition of this.

So when I got a second chance to invest in a couple of airlines, fresh from a beat down caused by the transitory effects of the falling Canadian dollar and exacerbated by the sheer size of the moves to the upside, I added not one but two stocks to my portfolio. Both are out-sized as starter positions for me. Here were my tweets at the time: Read more

Since that time I’ve sold a bit more and it’s now about 25% of my original position. It’s still a reasonable size but its not going to hurt me (I will remind you that as of my last portfolio update, when Pacific Ethanol was at about $14, the stock was a 16% position for me. That number jumped closed to 20% as the stock rose, but now sits at about 4% with my sales last week and the current price).

As the tweet explains, I didn’t like that the stock was going up because of rising ethanol prices while at the same time corn prices were creeping higher. This wasn’t the dynamic I had invested upon. I wanted sustainable ethanol prices and low corn prices. Ethanol can’t trade at nearly a dollar above RBOB gasoline and you saw that on Wednesday when the weekly EIA statistics showed imports of ethanol. The market was suitably spooked and the price of ethanol has since tanked. More on the ethanol price dynamic in a minute, but first let’s talk about Pacific Ethanol. Read more

I’ve been watching Lojack (LOJN) for a while, almost bought into it a couple of times but I’ve never been able to get comfortable until a few weeks ago.

The irony is that if I had waited a bit longer, I could have gotten in at about 15% less. Oh well. I always dislike writing up a stock that has already moved to the upside (I am in the process of doing just that with Air Canada right now). So here I get to do the opposite; tell you why I liked the stock at $6.20, and must really like it here at $5.40.

Why I bought Lojack in the $6’s

I decided to take a position after I reviewed the fourth quarter results. My reasons were:

The existing stolen vehicle recovery business appears to have reached an inflection where further increases in revenues should make a larger contribution to the bottom line

The outlook the company provided on Fleet was very positive

The stock price (around $6 at the time) priced in a modest improvement in the stolen vehicle recovery business but none of the upside of Fleet.